​Ideas Boom or Bust: Where the National Innovation and Science Agenda went wrong

It favours those who can take advantage of tax incentives rather than people doing something innovative. Source: Marc Brüneke (Flickr)

The government’s Ideas Boom reform package might “look good on paper”, experts say, but the changes to employee share schemes, R&D tax incentives, and new venture capital partnership arrangements do little to benefit local start-ups or attract foreign investors.

Economist, author and founder of LF Economics and LCrowd, Lindsay David told IDG that "The Australian government has built a hope-and-pray unicorn instead of trying to build a cockroach. They are hoping that this ideas boom is a big hit and will be a unicorn without doing the required elbow grease to build a sustainable growth model.” Which is to say, ‘the policy favours short-term investment by a handful of Australian venture capitalists’ but “does an incredible job keeping foreign investment and foreign entrepreneurs away.”

Seed funding ignored

The economist says the Australian government “has done a bad job articulating a bad idea,” and has completely neglected the facilitation of some early stage funding.

“In Australia you have eight or nine big names in venture capital and they’re all looking for bigger deals upwards of $1.5 million,” he said. “But the $50,000 - $1.3 million dollar range, that space is totally derelict and the government’s Ideas Boom stimulus package doesn’t do anything to address that.

“Australia lost more money from online dating scams ($23 million) than was invested in seed capital last year ($19 million).”

Multi-nationals neglected

Kevin Bloch, Chief Technology Officer for Cisco told IDG the government has neglected the role of multi-nationals in delivering domestic economic output.

“From personal first-hand experience, without a multinational it’s difficult to go global, even if you have capital... Addressing the global market from the start is incredibly important if we are going to develop a local innovation industry that can grow and be sustainable. We should never forget that while we can go to other markets, they too can come here."

Lindsay David concurs but says when investors and others come here they need to know where they’re going, and the lack of a central hub discourages creating Australian investment portfolios.

“It becomes an expensive venture if you’re flying out investors and they have to take 10 flights across the country just to cover their appointments... We need to focus on convenience. What are the chances of start-ups seeking angel investors and seed investment when they’re all within a 3-4KM radius of each other? The chances of them all being funded goes up.” He also said tax incentives were the wrong way to go about creating an Ideas Boom.

Lightweight government investment

Deb Verhoeven, Professor and Chair of Media and Communication at Deakin University, told IDG the funds allocated by the government “look piecemeal” compared to other countries in the OECD.

Historically, countries with booming innovation hubs have seen large-scale government investment in R&D. The US government spends up to $30 billion a year doing science and R&D through DARPA and other agencies which is then commercialised by the private sector.

“If our start-up scene grew at the same rate relative to the mining industry over the last 15 years, that’s when you know Australia has hit the sweet spot,” says Lindsay David. “Because if we are investing $190 million a few years down the line in high-quality, problem-solving, seed-stage investments a year rather than just $19m in seed investment we made in 2005, we know we are going to see more sprouts rise from the soil.”

Universities held to ransom

Professor Verhoeven says universities are being forced to prove the commercial viability of their research if they want to continue to receive funding.

“The government's announcement places emphasis is on getting universities to engage more with businesses but it primarily does this by focussing on how universities are funded (rather than applying levers to business)” says Professor Verhoeven. “Levering universities to undertake more applied research – at the possible expense of basic and experimental research will effectively be an innovation penalty. We need universities (and organisations like CSIRO) to undertake the kinds of non-commercial research that has consistently proven to be the engine of real, global benchmark innovation.”

The cuts to the CSIRO and the toughening of university expenditure will slow down Australia’s innovation curve, Lindsay David says.

“We need to start looking further down the line.”

Founders penalised by tax incentives

The Tax Incentives for Early Stage Investors penalise start-up founders.

While Early Stage Venture Capital Limited Partnerships (ESVCLP) will receive a 10 per cent non-refundable offset, founders should be wary that the provisions of the bill specifically exclude “affiliates” of a company from seeking tax incentives, meaning founders and other people in position of control over a company do not qualify for the concessions.

A spokesperson for Treasury told IDG “The Tax Incentives for Early Stage Investors measure aims to support start-ups by encouraging early-stage investment into innovative ideas and entrepreneurs.”

“This measure provides qualifying investors with a 20 per cent non-refundable, carry forward tax offset (capped at $200,000 per investor per year) and a 10 year capital gains tax exemption for eligible investments made into early stage innovation companies.”

Under the New Arrangements for Venture Capital Limited Partnerships measure, only companies that make $200k or less annually qualify for an ESVCLP and must meet five conditions as an “innovative company,” or earn up to 100 points through R&D, patents, grants and other activities. To qualify, companies must have been incorporated for at least six years or regulated on the ABR for three years and have a prior expenses bill of less than $1 million over three years.

Alexis Kokkinos, executive director and partner at Pitcher Partner told IDG the provisions specifically exclude affiliates of the company from seeking the concessions.

“If you either control or significantly influence the company, i.e. if you're a founder, the legislation currently excludes you from accessing the concessions,” he said.

"Furthermore, the provisions specifically preclude an entity from owning more than 30 per cent of the equity in the company, again predominantly excluding founders. These criteria were not outlined when the measures were announced. Indeed, the government has previously stated that the concessions would apply to all investors in innovation companies."

A Treasury spokesperson told IDG the New Arrangements for Venture Capital Limited Partnerships measure aims to attract more investment into start-ups with high-growth potential to help them move to the next stage of development.

“This measure provides a 10 per cent non-refundable tax offset for limited partners that invest in start-ups through new Early Stage Venture Capital Limited Partnerships (ESVCLPs), among other changes including relaxed restrictions on ESVCLP investments and fund size,” the spokesperson said.

HECS model a silent alternative

Graeme Turner, professor of cultural studies at the Institute for Advanced Studies in the Humanities told IDG that the tax incentive scheme accounts for around $9 billion a year most of which goes to large corporations “to pay for something they were going to do anyway” and favours those who can take advantage of tax incentives, rather than people doing something innovative.

If the government doesn’t want to actively pick sides, Turner said there are other mechanisms they could use, like a repayment scheme similar to HELP whereby start-ups get a government backed-loan that only requires a repayment once profits meet a certain threshold.

Australia is alone among about 40 developed countries that doesn't have a government backed start-up funding scheme, says James Solomons, head of accounting at Xero and CEO at Aptus Accounting & Advisory.

“In the UK small businesses can get a government backed unsecured loan for up to 25,000 pounds with a nominal interest rate which they have to pay back within five years,” he told IDG. “It comes with mentoring support from an assigned delivery partner. It’s designed so that entrepreneurs and business owners can give it a red hot go and if it fails, they don’t end up financially crippled.”

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